A Few Developments Augment Holiday Mood

The US dollar is mixed. Softer
against the European complex, but firmer against the dollar bloc. It is
essentially flat against the yen. Equity markets are advancing and the
Nikkei, which gapped above the 3-year downtrend line yesterday,
extended its gains by another 1%. Spanish and Italian bond yields are
lower.

Japanese
yields continue to edge higher, with the long-end of the curve
continuing to steepen gradually. The 10-20 year spread is near a
13-year high, for example. The BOJ's Shirakawa met with Abe briefly (20
minutes, according to press reports). The last big event of the week
is the BOJ meeting that concludes on Thursday.

Many
observers still seem to be debating the different scenarios, though a
Bloomberg poll found 17 of 21 expect the BOJ expand its asset purchase
program again. However, there is some speculation that the for the BOJ
to win the war is to lose the battle and that means adopting open-ended
QE before it is foisted on it. That was it can still control the
process and retain some semblance of independence. Yet another camp is
arguing that the BOJ may stand pat, defending its independence, and
forcing the new government to "fire the first shot".

The
dollar failed to extend yesterday's gains against the yen and a
consolidative tone is threatened. Initial support is seen near
yesterday's low near JPY83.60. Note that last week, the greenback
finished near JPY83.50.

For
its part, the euro tested yesterday's high (~$1.3190), but failed to
extend it, though another attempt in North America seems likely.
Sterling has extended its recent gains, but currently lacks meaningful
momentum above $1.62

Some
risk-taking may have been bolstered by reports suggesting some progress
on US fiscal talks. Two areas of compromise have surfaced. The first
is if taxes on high income will rise, what is the definition of high
income. Under the Bush tax cuts, it was $250k. Republican negotiators
seek to raise it to $1 mln. Obama has offered $400k. Both sides now,
though, seem amenable to changing how cost of living adjustment for some
benefits is calculated to use a chain CPI measure. Leaving aside the
technicalities, this would have the net effect of slowing the rise in
benefit spending.

Both
sides have been criticized in the past by their own members for
compromising too much too early. While there has been some movement,
there is no deal in hand and it still looks to got to wire, if not a bit
later.

Sweden's
Riksbank delivered a 25 bp rate cut that was widely expected and the
krona has ticked higher in a "typical" sell the rumor buy the fact type
of activity. Although there was no hint of a rate cut in 2013 and the
central bank again warned about household debt levels, we are inclined
to expect another 25 bp rate cut next year as the economy weakens and
core inflation remains soft. The Riksbank projects that after about
0.9% this year, core inflation will ease to 0.8% next year. Norway's
central bank meets tomorrow and is widely expected to stand pat.

The
minutes from the Dec 4 meeting of the Reserve Bank of Australia was
released. It appeared the decision to cut rate was a bit closer than
expected and there was not much of a signal for another rate cut.
Nevertheless, we expect another 25 bp rate cut possibly in February,
after the Jan 23, quarterly CPI report.

The
UK reported Nov CPI figures and they were firm with a 0.2% rise on the
month and a 2.7% rate year-over-year. The consensus expected a 2.6%
year-over-year rate. Food and housing helped lift the price of the
consumer basket, while furniture and transportation held it in check.
The near-term risk is on the upside, with the utility hike likely to
filter into the Dec and Jan reports.

An interesting divergence is emerging between the Euro and Sterling USD crosses. GBP is falling back a bit but the Euro is remaining stubbornly in a very tight range. Usually, they are shadows of each other.

Could it be an indication that currency pair relationships are about to make a change?

The conversations in many of the boardrooms across the financial sector are ending with the phrase "just do it". Not necessarily in a good way, capital and talent, once disrespected, goes elsewhere, or simply goes away. Trading on jawboning is too tiresome for me. Heading to Deer valley, slopeside, for a couple weeks. You guys fight this one out.